Mortgage - Legal Question

House is valued at 300K. Mortgage Broker arranges a mortgage for 150K, knowing but not revealing that the other 150K is financed by a second mortgage held by the seller.

To me this seems unethical if not illegal. Need some advice.

Not a lawyer, but it sounds unethical (not revealing is a sort of conflict of interest?) and also somewhat immoral. Is it illegal? Probably not, but find out anyway.

I took classes to become a property appraiser. Of ALL the folks involved in real estate transactions, the appraiser has the most training in ethics...supposedly MORE than lawyers, and certainly more than mortgage brokers. They (the appraisers) are also probably held to the highest ethical standards in the whole process of buying and selling a property...seems like banks/mortgage brokers and R/E agents need to be brought up to the same standards.

I would hope that the next time I need a mortgage, I DON'T run into someone like your person.

A 2nd mortgage is just that- it holds a position of secondary priority to the first.

If the broker arranged a 150K first mortgage, it makes no difference to the lender if there is a 2nd. If the property goes into default or is auctioned to pay the debt, the holder of the first mortgage will be paid first. If there are shortfalls, the second will not get paid, but the first will still be paid completely.

I see no real issues (other than the fact that the application probably asked the right questions, and someone probably lied).

The holder of the first mortgage would be an idiot if they didn't do a proper title search that revealed the existence of the 2nd. The holder of the 2nd would be an idiot if they did not file the mortgage properly so it could be seen by the holder of the first.

I say if they missed it, they failed to do their own adequate due diligence.

The goal of the first mortgage holder is that they not be exposed in excess of a defined percentage of the appraised value. Sounds like they have a 50% stake.

If YOU are the holder of the 2nd, be VERY careful. If the property ever sells for less than the appraised value, you will NOT get paid. This is pretty common these days.

I have walked from deals where I was the holder of the 2nd mortgage. One was a construction lien. The first holder had a $230k lien. I was 2nd with a $5k lien. Property was worth about $240, but still needed work in a shaky economy. At the auction the holder of the first mortgage nearly begged me to outbid him. I couldn't figure out why I would pay $230k to protect $5k.

I don't have a problem with the basic ethics. The mortgage holder should do his own due diligence.

I'm not sure what you're upset about?

Are you the seller, purchaser or innocent bystander?

And it does make a difference to the first lien holder that there is a 2nd.

Was the buyer looking for 100% financing?

I lien towards it being a bit shady.

(see what I did there? Lien? Get it?)

carguy123 wrote: Are you the seller, purchaser or innocent bystander?

My wife holds one of 3 second mortgages. And it is now in default.

Probably also depends on the terms of the first mortgage - I don't know about the US but in the UK, a lot of mortgage contracts have a clause in them that the first lien holder has to approve any additional mortgages. If that's the case with the mortgage you're looking at, this might well become an issue due to breach of contract and fun stuff like that.

My advice as a lawyer - talk to a good local real estate lawyer. Yes it will cost you a few hundred dollars but sounds like she's got a lot at stake here.

Hal wrote:

carguy123 wrote: Are you the seller, purchaser or innocent bystander?

My wife holds one of 3 second mortgages. And it is now in default.

The first is in default, or the one she's holding? Is her's secondary to the other seconds (as in, is it actually a third or fourth?)

Are you saying there WAS another 1st (when she took the second), which was paid off then replaced, or are you saying her's became secondary without her awareness?

You don't have to answer. Each of those changes her position a bit, but all of them are not very good.

It's shady.

carguy123 wrote: And it does make a difference to the first lien holder that there is a 2nd.

Yeah, but it shouldn't.

It addresses the ability to pay of the buyer, but not the collateral.

SVreX wrote: The first is in default, or the one she's holding? Is her's secondary to the other seconds (as in, is it actually a third or fourth?) Are you saying there WAS another 1st (when she took the second), which was paid off then replaced, or are you saying her's became secondary without her awareness? You don't have to answer. Each of those changes her position a bit, but all of them are not very good. It's shady.

The 3 secondary mortgages were written for terms of 5, 6, and 7 years. My wife's is the 5 year one and is now in default.

The secondarys were set up about a week after the first mortgage by a lawyer that was recommended by the broker who set up the first mortgage. The broker had full knowledge that the seconds were going to be written and from comments she made did not reveal that to the company she sold the first mortgage to.

I figure that my wife is out of luck unless she forecloses which she probably won't do,

I was looking into buying a bar in OZ years ago, until our due diligence brought to light a $250K undisclosed loan against the business, and it was owned by a star footballer as well.

Never trust anybody when it comes to business.

Not all subordinate mortgages are 2nds. They are numbered as to place in line. 2-3-4- etc.

You still haven't really explained your concern or condition, but I think you are saying that your wife might have made a second mortgage (or 3rd mortgage) on a property that was already under collateralized?

Did she do so without checking lien status? If so I have little sympathy for her. That is a very basic step in the process.

The broker, or anyone, arranging the original 2 liens wasn't at fault. If she didn't check lien status then she was at fault.

Now if the original owner carried second was not recorded then it doesn't have a superior status. Status, and lien number, is determined by the order in which they are filed, not the order in which they are made.

But if the original REAL lender thought the buyer was putting down 50% ($150,000) then that is fraud. If the original loan was an FHA, VA, or Conventional loan done to federal standards (Frannie loan) then that makes it a federal offense for all parties involved. And that includes the Seller, Buyer, lender and probably the closing agent.

Seller-held 2nds were pretty common back a few years ago when we still saw a lot of B/C paper (up until about 2006-07).

There's nothing wrong with a seller held second. It's many times the simplest way to make a deal work so nothing shady there.

Now if they didn't disclose a seller second to the buyer's lender &/or contrived to make it appear the buyer was coming up with all that money then that's another issue altogether.

If Hal's wife funded a tertiary loan without checking that's a personal issue. And is neither inherently legal or illegal, just not smart. It's easy to verify by disinterested third parties.

If the seller didn't file the lien of record that's another issue.

There's just not enough facts to know if anyone did anything wrong.

Full Disclosure:

The house was my mother-in-laws. When she died a niece wanted to buy it but could not get a loan from any bank. She contacted this broker who came up with this scheme.

She could get the niece a loan for about half and the children would agree to taking a second mortgage for their share of the sale. She talked 3 of the 5 children (my wife being one) into this scheme. She made sure that the first mortgage was a done deal before getting the children to do their mortgages. It was obvious to me from her comments that she had no intention of informing the lender for the first mortgage that there would be seconds.

All the mortgages are recorded with the first being recorded about a month before the seconds.

The wifes mortgage is now in default and I don't see any way she will ever get her money. If if she forecloses she probably wouldn't get anything after the first mortgage was satisfied.

The money is gone, but I would love to put the broker out of business. I am trying to find out if there are grounds to file a complaint with the state licenseing agency.

Interesting to me...
My guess is that since the bank was in the position to be paid first, the bank would little care if there were 2nd or 3rd loans. As long as the bank was first, it is highly likely that the bank will get its money should there need to be an auction.
Did your wife know that she was in a secondary position?

disclosure: I know nothing about loans but rather am just a casual observer who likes the learning.

"She made sure that the first mortgage was a done deal before getting the children to do their mortgages. It was obvious to me from her comments that she had no intention of informing the lender for the first mortgage that there would be seconds."

How did the broker close on the first at a 50% LTV without there being cash at the cloing for the remaining 50%. By my experience, they should have all been closed and recorded by the title company concurrently.

If the property is worth what is owed on the first, then none of the junior lien holders will have any incentive to foreclose. If the niece is keeping the first mortgage current, then just wait and hope the property is worth more in the future.

Presumably, at the time your wife and her siblings made those junior loans, they knew about the first mortgage and believed the property was worth than (or at least ) the sum of the first broker arranged loan and all theirs. The fact that the property is not now worth that much is a scene being played out millions of times around the country.

How do you know the 1st lien holder didn't know about the 2-3-4-5-6 loans? The buyer had to prove up funds, sales price and see the sales contract.

To me it's sounding more like sour grapes than any real problem.

Is the problem that the house isn't worth today what it was worth yesterday? And was it really worth that or did the heirs just say "I'm not selling unless I can get $300,000?"

Did you see the appraisal on the property at the time of the sale?